The Carrier Perspective: How AIG Utilizes Medical Experts; A New Player Takes On Hard To-Insure WC Risks; And The Hartford On Why It’s Not Just About Getting Rate

It’s no secret that Workers’ Compensation is a challenging line of business, to say the least—carrying an annual industry combined ratio well into unprofitable territory (117.2 in 2011— the highest in the last decade and the highest among all major insurance lines).

As the overall insurance market hardens, Workers’ Comp is among the lines consistently seeing the largest rate increases. But for years, this line has been severely underpriced—and so the industry is far from digging itself out of that hole, despite the recent rate hikes. Nevertheless, Workers’ Comp premiums for private carriers and state funds increased to $35.67 billion in 2011—a 13.3 percent jump from 2010 and the first increase since 2006, according to SNL Financial.

PC360-NU turned to experts in the field to find out what the insurance industry is doing to improve results for a line with so many complexities and ever-evolving cost drivers, from an aging workforce to narcotics abuse to outright fraud.

Russell Johnston, Casualty Product Line Executive, U.S. and Canada, AIG

Speaking to overall market conditions, Russ Johnston, casualty product line executive at AIG, says “Workers’ Comp is producing a return on equity in the low single digits—well below what the industry seeks to get. For anyone, that is not an acceptable long-term result.”

AIG saw Workers’ Comp rates improve 8.9 percent in Q3 of 2012. And while rates have been going up for the last two years, they still have a long way to go to get to where they need to be, Johnston notes.

To be successful in Workers’ Comp, it’s important to be picky when it comes to risk, he says: The market is “highly regulated in terms of price, so in order to navigate it, you have to be selective.”

AIG does not forbid Workers’ Comp underwriting in any particular state. “There are good underwriting risks in any geography,” he adds.

To get a better handle on loss drivers, and then to “bake this data into the claims-adjudication process,” AIG recently enlisted the Johns Hopkins Bloomberg School of Public Health to analyze 10 years of Workers’ Comp records: 2.3 million patient files and over 20 million medical invoices.

An early look at the data (which has been submitted for peer review by academic journals) reveals “how much opioid management is a loss driver,” says Johnston. High doses of opioids are being doled out, to the detriment of insureds’ long-term health and driving substantial insurer costs.

A decade ago, Johnston notes, indemnity used to be the big driver of costs. Now, it’s medical costs—and to help control expenses, AIG takes “aggressive action” to get workers “the right care at the right point in time.” As a key part of this medical-cost-control strategy, AIG employs over 250 doctors and nurses. “In order to have a constructive outcome with injured claimants, you need to have real clinicians,” he notes. When claims are reported, the insurer recognizes certain signs of big-cost problems and deploys these doctors and nurses where they are needed most.

Third Coast Underwriters opened for business on July 1, 2010 with a plan to specialize in traditionally hard-to-insure Workers’ Comp risks that require customized solutions. Key to its strategy is expertise and commitment to the niche lines of business it writes. “You can’t dabble in the classes we work in,” says Scott Babcock, vice president of customer relations and loss control.

Third Coast, whose average account size is $350,000 in premium, handles such employer classes as construction, energy, longshoremen, garbage haulers, recyclers and scrap-metal operations. The company models each class to identify loss sources to cut down on frequency. “There are going to be high-severity losses. You can’t help that. But you can cut down on how often they happen,” Babcock says.

Asked about where the opportunities lie for a new market entrant such as Third Coast, President Marguerite Dixen says more Workers’ Comp generalists are shedding high-risk accounts as markets harden. She also sees more mono-line opportunities: multi-line carriers willing to carve out the Workers’ Comp component of coverage packages for Third Coast to write. “We’ve gone from asking for business to getting calls daily,” says Dixen, adding that the company’s premiums have tripled since it began operations.

Commenting on current pricing, Dixen says some insurer competition “remains irresponsible” with regard to rate: “We’re not pricing ourselves into the market. It’s more about a cultural fit with our customers. Our clients recognize the need to improve outcomes rather than pay a cheaper premium.”

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